A business credit card can be of great benefit to both new and experienced business owners.
It can help you establish a business credit history and provide useful rewards and perks that can make your life a little easier.
But depending on the business credit card you choose and how you use it, it can also help or hurt your personal credit score. Before choosing a card for your business, it’s important to understand how it can affect your personal credit and what you can do to prevent damage.
3 Ways a Business Credit Card Can Affect Your Personal Credit Score
From the moment you apply for a business credit card to the time your account is closed, it can help improve or tarnish your personal credit. Here’s how:
Initial loan request
Almost every time you apply for a credit card or loan, the lender will make a hard inquiry on your personal credit report, and this is no exception for most business credit cards.
“It’s very difficult to assess [small business owners] solely by their business profile,” says James Garvey, CEO of Self Lender, a company that offers homebuilder loans.
This is especially true for new companies that do not yet have a credit history.
“You may also need to provide a personal guarantee,” Garvey adds, “where you guarantee that if the business defaults, you will be required to repay the debt.”
Business credit card issuers will review your personal credit to determine if you can deliver on that promise.
Fortunately, a tough credit check won’t improve your creditworthiness much. FICO estimates that if there is any impact, it will reduce your credit score by less than five points. The only exception is if you apply for multiple credit cards and loans within a short period of time, this could be a sign that you are in financial trouble.
Most major credit card issuers do not report all activity on your account to consumer credit bureaus. Some, however, may report negative information if you are late on a payment or your account is not in good standing for some other reason.
Here are some card issuers with some more specific terms:
- American Express may report activity if your account has a bad reputation.
- Bank of America can report account activity if you are late in payments.
- Barclays may report account activity in certain situations.
- chase reports account activity if the payment is overdue by 60 days.
Your payment history is the most important factor in your credit score, so a late payment can lower your score by several points. Moreover, late payments can make it difficult to get a loan for personal use.
In addition, the credit card issuer may invoke a personal guarantee requiring you to pay the bill in person.
“Small business owners should definitely strive to pay on time,” says Garvey, “because you don’t want to be personally liable for corporate debt in the worst case scenario.”
High credit utilization rate
Although it is rare for a business credit card issuer to report your monthly account activity to the consumer credit bureau, some do. The two major card issuers are Capital One and Discover.
The problem that this setting can create is that if your business tends to spend a lot of money each month, the card issuer could report a high balance on your personal credit report, which could lower your credit score significantly because your credit utilization ratio will increase (“amounts owed” is the second most important factor in your FICO score).
This is exactly what happened to Mike Kolb, the founder of Xwerks, a Florida food manufacturer. Kolb applied for two Capital One credit cards to take advantage of time-limited offers, but then his credit rating dropped by 137 as the bank reported large balances.
“Looks like I have tens of thousands of dollars in credit card debt, when in fact I just use [the cards] to buy inventory,” he says. “I always pay my balance in full.”
After that initial slump, Kolb’s credit rating rebounded to 73, which he attributes to his recent decline in account balances. Once he earns card signup bonuses, Kolb plans to switch back to his American Express business credit cards, which don’t report balance information on a regular basis.
Unfortunately, business credit card issuers typically don’t announce in advance whether they report information to consumer credit bureaus.
“Whether they report or not is very important how you can use the card and whether you need a card at all,” says Mike Keenane, former head of US bank cards at TD Bank, “so ask a question. Do your research.”
Tips for Preventing a Business Credit Card from Ruining Your Personal Credit
Depending on which card you choose and how you use it, a business credit card can either help or hurt your credit score. Here are a few things you can do to only report positive things:
Get a card that does not require personal guarantee
Most small business credit cards won’t approve your application without a personal guarantee, but some will if your business is performing well.
“Above a certain amount of income or [other financials], you can upgrade to what some banks call a corporate card, which is not guaranteed based on a person’s personal credit,” Kinane says. “It’s based on the credit history of the business.”
However, the approval threshold for these cards may vary. For example, American Express requires at least $4 million in revenue for the most recent fiscal year, while Capital One sets an annual revenue target of $10 million.
The Brex Card, on the other hand, recommends that your business has at least $100,000 in your company’s bank account at the time of application and is backed by a venture capital firm.
If you can qualify for one of these cards, not only will you skip the initial loan request, but you won’t have to worry about providing any information in the future either.
Always pay on time
Whether your business credit card reports only past due activity or all of your activity, it’s important to pay your monthly bill on time each month and preferably in full.
“If you find yourself in a situation where you constantly have a large balance and you don’t have a plan to pay it off,” says Garvey, “it can get very frustrating very quickly.”
By creating a positive payment history, you can prevent negative information from being passed on to consumer credit bureaus and also potentially help improve your personal credit score.
Time of monthly payments
If you have a credit card from an issuer that reports all activity on your account, an easy way to avoid high utilization rates is to pay off the balance a day or two before the bank reports to the consumer credit bureau. This usually happens on the day of issue, but call your card issuer to double-check.
Alternatively, you can make multiple payments throughout the month to keep your balance relatively low. Keeping your business credit card balance at a healthy usage level can have a positive impact rather than a negative one.
If it’s time for you to open a business credit card, make sure you do your research when you’re looking for the best match. Compare different cards not only to find the best deal, but also to make sure its rewards match your personal spending habits. And before you apply, check your personal credit reports to make sure all the information on them is correct – this will give you an idea of your credit status and help you choose the cards you are most likely to apply for.